Fundamentalists vs Technicalists: The Key Differences

The key distinction between fundamentalists and technicians is their approach to decision-making in the market. Which one is better and how to decide the right one?

In the trading world, there are two types of traders based on approaches for making decisions in the market: fundamental and technical.

Fundamental analysts base their trading decisions on the reasons behind price movements, while technical analysts focus on the effects (price movements) without delving into the reasons behind them.

Which one is better: fundamental or technical analysis?

The answer depends on the trader's preference. What works for you does not necessarily work for another trader.

Understanding Fundamentalists

Traders who use fundamental analysis to make decisions in the market are referred to as fundamentalists.

In the forex market, where currencies are traded, economic conditions play a big role in price changes. So, fundamentalists keep an eye on economic news that can affect the currencies they're trading, along with broader economic changes.

There are different economic events, like inflation, GDP, retail sales, and employment data that can impact currency values. Apart from that, political events can also influence a country's currency.

For instance, during the conflict between Russia and Ukraine, the value of the Euro decreased due to market uncertainties and instability.

How Fundamentalists Trade

For long-term trading, fundamentalists have a broader focus. They think about various things like where central banks are heading with interest rates, inflation numbers, economic growth figures, and even geopolitical news.

On the other hand, when fundamentalists trade in the short term (news trading), they mainly focus on economic news about the currency pairs they're trading. For example, if a fundamentalist is trading the GBP/USD pair, they keep an eye on news from the UK and the US. They watch how the chart reacts before and after the news is out. Once they confirm how the prices are moving, they start making their moves in the market.

The Main Tools of Fundamentalists

1. Economic calendar: An economic calendar includes news on economics that can influence currency values.
2. Reliable current news outlets: Various reliable news channels help fundamentalists stay informed about the latest developments. Examples include Reuters, Bloomberg, LiveSquawk, and Newsquawk.
3. Supportive websites: Supportive websites are utilized to analyze a country's economic conditions more thoroughly. These sites can present historical data on inflation, employment, and economic growth spanning over a decade. An instance of such a site is Trading Economics.

Factors to Consider in Fundamental Analysis

1. Central bank policies: Central banks play a crucial role in a country's economic stability. Their policies, such as interest rates and monetary supply, can significantly impact various economic indicators. Fundamentalists analyze central bank policies to understand the direction of interest rates and the overall monetary stance. This information helps them assess the future economic conditions, inflation expectations, and the attractiveness of different investment options.
   
   
2. Inflation data: Inflation measures the rate at which the general level of prices for goods and services is rising. It is a key economic indicator that reflects the purchasing power of a currency. Fundamentalists are concerned with inflation because it can erode the real value of money. By analyzing inflation data, they can assess the health of an economy and make informed predictions about future interest rates and investment returns.
   
   
3. Economic growth data (such as GDP, Retail Sales, Manufacturing Index, etc): Gross Domestic Product (GDP) represents the total value of all goods and services produced by a country. Retail sales measure consumer spending, while the manufacturing index reflects the health of the manufacturing sector. Fundamentalists focus on these indicators as they provide insights into the overall economic condition. A growing GDP, strong retail sales, and a robust manufacturing sector are indicative of a healthy economy, while the other situation could mean a declining economy.
   
   
4. Employment data (Non-Farm Payrolls, Unemployment Rate): Non-Farm Payrolls represent the number of jobs added or lost in the economy, excluding farm employment. The unemployment rate reflects the percentage of the labor force that is unemployed. Employment data is crucial because it directly impacts consumer spending, a major economic activity driver. Fundamentalists monitor these indicators to gauge the health of the labor market and make predictions about future economic conditions.
   
   
5. Geopolitical news. Geopolitical news refers to events and developments on the global stage that involve the relationships between countries or international affairs. These events can include political decisions, conflicts, treaties, sanctions, and other situations that have implications for the global economic landscape. Geopolitical news is crucial because it provides valuable insights into the broader economic environment. It can also significantly influence market sentiment and drive adjustments by governments and central banks.

Understanding Technicalists

Traders who use technical analysis to make decisions in the market are referred to as technicalists or technicians. Unlike fundamentalists, technicalists steer clear of big economic news. They prefer trading in quieter currency pairs because they are easier to predict.

A technicalist studies past price movements to guess where prices might go next. They think that patterns in charts repeat themselves, and even though it might seem random, there are certain hidden patterns. If they can figure out these hidden patterns, they can use them to understand what's happening and predict where prices might go.

In practice, technicalists have more ways or strategies for trading. Some use price action, some use different indicators, and some mix chart patterns/candlesticks with indicators.

How Technicalists Trade

Technicalists trade by looking for specific patterns or certain steps of signals to decide when to enter the market. When it comes to using indicators, technicalists can be divided into two groups: those who trade with and without indicators (naked or price action traders).

Price action traders base decisions on actual market prices, using candlestick or chart patterns as signals. On the other hand, traders relying on indicators like Moving Averages, Bollinger Bands, RSI, and MACD use the signals generated to guide their market decisions.

For instance, price action traders might use the head and shoulders pattern in charts as a signal to start selling in the market. If the head and shoulders pattern hasn't formed in the price yet, they won't open a position. But once they see signs that the pattern is developing, they'll watch closely to make sure the signal is valid. When the signal for the head and shoulders pattern is confirmed, that's when price action traders make their move.

The same approach goes for technicalists who use indicators like MACD. If the MACD signal hasn't appeared, they will just observe without getting into the market. Once a valid MACD signal appears, technicalists then jump into the market.

The Main Tools of Technical Analysis

• The price itself. Technicalists, especially price action traders, believe that all relevant information on an instrument is already reflected in its price. By analyzing price patterns, trends, and key levels, they aim to make predictions about future price movements and identify potential trading opportunities.
• Technical Indicators. Technicalists could use various indicators to gain insights into market trends, momentum, and potential turning points. These indicators provide quantitative measures of market conditions so they can be utilized to confirm trends, identify potential reversals, and generate signals for buying or selling.
• Supporting tools such as Fibonacci retracement, pivot points, etc. Technicalists believe that certain price levels and time intervals are significant in the market. These tools help identify such levels to anticipate potential changes in price direction.

Factors to Consider in Technical Analysis

1. Trend: The trend represents the general direction in which the price is moving over a specific period. It can be upward (bullish), downward (bearish), or sideways. Technicalists analyze trends to identify the prevailing market sentiment. Many technicalists believe that "the trend is your friend." Trading in the direction of the trend is considered advantageous because it increases the probability of successful transactions and offers a potentially more favorable risk/reward ratio.
   
   
2. Levels: Levels refer to specific price points on a chart that are considered significant, such as support and resistance levels. Support is where buying interest is significantly strong, preventing the price from falling further. Resistance is where selling interest is strong, preventing the price from rising further. Technicalists believe that certain price levels act as psychological barriers and influence market behavior, so they could indicate potential turning points or breakout areas. Trading at these levels is thought to offer strategic entry and exit points.
   
   
3. Signals: Signals in technical analysis refer to the specific sign when a technicalist decides to enter or exit a trade. It involves identifying favorable conditions based on technical indicators, chart patterns, candlestick patterns, and other signals. Technicalists emphasize the importance of entering the market at the right time to maximize the profit potential.

Case Study

To make it easier for you to grasp the fundamentalist and technicalist concepts, let me share a case study.

On January 17, the UK released its yearly inflation data. The previous rate was 3.9% and is expected to drop to 3.8%. However, the actual figure surprised the market by reaching 4%, strengthening the pound sterling.

The increase in inflation prompted market optimism as it suggested a potential interest rate hike by the Bank of England, further boosting the pound's value. GBP/USD surged immediately after the news release.

Seeing this, short-term fundamentalists (news traders) entered the market by initiating buy positions shortly after the announcement. Once the buy positions were established, prices continued to rise, eventually reaching the take-profit level.

Unlike fundamentalists, technicalists chose not to enter positions right after the economic news release. Instead, they decided to wait and see if prices displayed a valid pattern for entry.

When prices surpassed the last resistance level, technicalists interpreted the trend on the M15 chart as changing from a downtrend to an uptrend. They patiently waited for a price pullback to the previous resistance level, which now acted as support, before entering buy positions. As prices retraced to the support level, the buy positions were executed. 

In the following moments, the price turned out to continue their upward movement, eventually reaching the take-profit level.

Final Words

Simply put, fundamentalists and technicalists differ in their approach to prices. Fundamentalists analyze the reasons behind price movements, while technicalists focus solely on observed prices without worrying about the reasons.

To make it simpler to grasp, we've created a comparison table.

Both fundamentalists and technicalists have their pros and cons. Success in trading isn't limited to either group, as both have successful and unsuccessful traders.

It's not essential to argue about which one is superior, as the key is to find the method that works best for you to ensure consistent profits. As such, consider the trading styles, commonly used tools, and the factors that influence the decision-making to choose the most ideal one.

Remember, your goal is to choose what works best for you to achieve consistently profitable.

To see what works without risking any money in a trade, you could practice fundamental or technical analysis in a demo account. The feature is free and provides virtual balance as high as $1,000,000 at your disposal.